THE CENTRAL BANK’s Monetary Board (MB) on Thursday cut benchmark interest rates by 25 basis points (bps) in its third policy review for the year, hours after the Philippine Statistics Authority (PSA) reported that the economy grew at the slowest clip in four years last quarter and two days after the PSA said inflation eased to the slowest pace in 16 months in April.

“At its meeting on monetary policy today, the Monetary Board decided to reduce the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points to 4.5% effective on Friday, May 10… The interest rates on the overnight lending and deposit facilities were reduced accordingly,” Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said in a press conference late in the afternoon at the central bank headquarters in Manila.

Mr. Diokno — who has described banks’ already reduced (by a total of 2 percentage points last year) reserve requirement ratio (RRR) as “really high” — also said that while there was “no decision yet” on this issue, it will be “on the agenda next week” of MB’s weekly meeting.

The MB’s move yesterday took the overnight deposit rate to four percent from 4.25% and the overnight lending rate to five percent from 5.25%, partially dialling back a cumulative 175-bp hike fired off through five meetings last year as the BSP scrambled to put a lid on inflation which increased for nine straight months to a nine-year-high 6.7% in September and October. Headline inflation has since slowed for six months to a 16-month-low three percent.

“The Monetary Board’s decision is based on its assessment that the inflation outlook continues to be manageable, with easing price pressures owing to the decline in food prices amid improved supply conditions,” the BSP said in a statement read by Mr. Diokno.

“In deciding on the stance of monetary policy, the Monetary Board noted impact of budget delays on near-term economic activity, but took the view that prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and continued implementation of the government’s infrastructure program,” it added.

“In addition, the Monetary Board observed that the global growth momentum has slowed in 2019.”

In a separate briefing before lunch, Socioeconomic Planning Secretary Ernesto M. Pernia said Mr. Diokno had called him that morning to ask about first-quarter gross domestic product growth, which turned out to have slowed to a four-year-low 5.6% against a 6.1% median in BusinessWorld’s poll last week of 20 economists.

INFLATION FORECASTS CHANGE
In the same afternoon central bank briefing, BSP Deputy Governor Diwa C. Guinigundo said the MB decided to cut to 2.9% the already reduced three-percent inflation forecast for this year that was adopted in its March 21 policy review, but increased next year’s forecast to 3.1% from three percent previously.

The BSP’s inflation target range this year and next remains 2-4%.

“… [T]he Monetary Board also noted that the risks to the inflation outlook remain broadly balanced for 2019 amid risks of a prolonged El Niño episode [which the Philippine Atmospheric, Geophysical and Astronomical Services Administration now expects to last till August] and higher-than-expected increases in global oil prices,” the BSP statement read.

Asked later on by reporters on prospects for future adjustments in policy interest rates, Mr. Guinigundo noted “[t]here was some flexibility exercised by the Monetary Board by way of normalizing the 175 bps… It is not a full normalization, of course, because monetary policy cannot be done in one sweep, in one go.”

“We have to be data dependent, evidence-based so that every move that we do, we know the consequences or the complications of the measures.”

Sought for comment, Ruben Carlo O. Asuncion, chief economist of the Union Bank of the Philippines, Inc., replied in a mobile phone message that the Monetary Board’s latest move would be “generally good for banks and it will help ease tight lending and/or credit” and “will help the economy expand and grow.”

In an e-mail, Security Bank Chief Economist Robert Dan J. Roces said: “We think that an RRR cut is more positive for economic growth as domestic liquidity and aggregate demand could be better augmented by this policy action, especially in light of the sub-6% GDP growth rate and low money supply growth.”

The central bank has estimated that reducing banks’ RRR by 100 bps would inject about P90 billion into the financial system. — Reicelene Joy N. Ignacio

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